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- [00:00]
John Bowman
Well, welcome listeners to this off season countdown of our inaugural season of Capital Decanted. Coming in at number three was a new global order, how to Integrate Geopolitics into Portfolio construction. With Marko Papich of Clocktower Group and Anastasia Tatarczyk of New York Common. In it we tackle this difficult question of how to approach a repeatable, consistent framework of integrating your geopolitical long term view into asset allocation portfolio construction. Stay tuned. Welcome to Capital Decanted. In this show we say goodbye to tired market takes and superficial soundbites because here, instead of skimming the surface, we dive into the heart of capital allocation, striking the perfect balance and exposing the subtleties that reveal the topic's true essence. Prepare to have your perspectives challenged as we open up the issues that resonate with the hearts and minds of those shaping capital allocation. We've enlisted the wisdom of visionary leaders in the industry and just like a meticulously crafted wine, will allow their insights to breathe, unfurling their hidden depths and transforming our understanding. This is season one, episode seven of Capital Decanted. I'm John Bowman.
- [01:26]
Kristy Hamilton
And I'm Kristy Hamilton and we are your hosts.
- [01:29]
John Bowman
A huge thank you as always to our season one title sponsor, Franklin Templeton Alternatives. With over 40 years of alt investing and $260 billion of asset center management, they've assembled and offer specialist investment managers across six different asset classes. Private debt, hedge funds, real estate, infrastructure, private equity and venture capital. And of course, all of them operate with the client first mentality that has always defined Franklin Templeton to prioritize investment outcomes. So thanks so much. Franklin Templeton Alternatives. Christy, I am so excited about this episode. I think part of this is that I'm a bit of a homer for geopolitics and in another lifetime would have pursued a career in political science if I would have actually known back then in the mid-90s that there were actually jobs for those types of people. It was certainly my favorite class in undergrad, but oh, well pursued business and finance and the rest is history. I'm also excited because when I talk to allocators, I would say they are either just beginning to think about this or they're overwhelmed with how to properly think about it. And there is plenty written and said about geopolitical risk, but very little about how to actually use geopolitical analysis to make investment decisions. So as we'll uncover, there is a big difference between those two. So I think this is a hugely timely conversation and episode. So, Christy, you don't know this is coming listeners. Christie doesn't know this is coming. But I'm going to start by reading you the best geopolitical speech ever, because it set in motion a thawing of the most dangerous existential period of tension between nation states, at least over the last century. So when I was thinking about, how do you choose the best, the most influential, I was burdened long and hard. So I could have gone, of course, with one of the epic orators of American presidents, Teddy Roosevelt, jfk, Ronald Reagan, maybe, or maybe one of the iconic British speeches. Clearly, Winston Churchill has a whole bunch. Elizabeth, the first, or maybe the sobering and inspiring human rights champions, Martin Luther King, Nelson Mandela, Mahatma Gandhi. Lots of choices. But after much deliberation, I went with this one. And by the way, I should just say, just to validate my point, if you had bought the market around this period when this speech happened, you would have earned over 6,000% or 11% per year in the ensuing nearly 40 years to today. So it moved markets. So let's see if you recognize it. Christie, you ready? During this fight, I've seen a lot of changing in the way you feel about me and in the way I feel about you. In here, there were two guys killing each other, but I guess that's better than 20 million. I guess what I'm trying to say is that if I can change and you can change, everybody can change. Recognize that.
- [04:16]
Kristy Hamilton
I don't.
- [04:18]
John Bowman
Your dad's going to be disappointed again.
- [04:20]
Kristy Hamilton
He really is.
- [04:22]
John Bowman
Which is a common refrain on this show, I might add, is Christie's dad's disappointment. But that was none other. The statesman, the diplomat Rocky Balboa, after his defeat of Ivan Drago in Moscow on Christmas Day, 1985, in the height of the Cold War. Now you're laughing. But before listeners, you caricature the Rocky series and me, I want you to consider this. I mentioned the performance since then, but consider this. Mikhail Gorbachev, the real one, not the one from the movie, but the last leader of the Soviet Union, became General Secretary of the Communist Party on March 15, 1985, during the production of this movie. And of course, he was the architect of a series of reforms we know as pastroika, or restructuring in English, glasnost, or openness in English. And that, of course, softened the rhetoric with the west, eventually, as we know, contributed to the breakup of the Soviet Union. And in his speech to the UN in December 1988. So that's almost three years exactly after Rocky's speech, Gorbachev said this. I would like to believe that Our hopes will be matched by our joint effort to put an end to an era of wars, confrontation and regional conflicts, to aggressions against nature, to the terror of hunger and poverty, as well as to political terrorism. This is our common goal, and we can only reach it together. Everybody can change, as Rocky said. He borrowed plenty of language from that speech, and less than a year later, the Berlin Wall fell. So I will let all of that settle in. And of course, I am mostly jesting here, not completely, but geopolitics. So let's move on to the more serious topic here, geopolitics. What do we mean when we say this? Well, historically, as you might know, the definition, the word, the practice, was intertwined with geography, with physical proximity, and especially how changing and evolving state boundaries would affect foreign policy and power. It was also quite nebulous and hard to pin down as I researched this. And that latter part, frankly, I don't think has changed very much. So just as an example, the International Encyclopedia of Human Geography spoke to it this way in 2009. A couple quotes I want to give you here, quote, geopolitics that is, nothing real. Nothing real from an essentialistic point of view, geopolitics is a social construct, a sort of social practice. No wonder that there is no solid core of knowledge. In this respect. Geopolitics seems to be fluid. It runs through your fingers. I love that. As intangible as it might be a significant impact it still has, that author, whoever he was, writes like Yoda, geopolitics, elusive and confusing. It is, but I think the point is very good. Another quote from that same textbook back in 2009, quote, Geopolitics is traditionally the study of how political power is reinforced or undermined by geographical arrangements, boundaries, coalitions, spatial networks, natural resources getting a little bit better, a little bit broader. And then a final definition from George Freeman, who is the father of modern geopolitical analysis, and we're going to talk a little bit about him in a minute. But he describes it as the framework that helps us see the intricate connections between political, economic, military and geographic dimensions of our world. So, again, progressing towards a better and better definition. I think these are all true statements, but frankly, after this research, I'm not sure any of them quite nail it. I think it's much more expansive than that. These are a little bit reductionist, I think, in today's economically interconnected and technologically advanced world. Now, maybe that's because my lens is from an investment standpoint. Nonetheless, while our goal here is to help listeners understand why geopolitics should play an increasingly important role in capital markets and asset allocation. We don't pretend to be political scientists ourselves, but I think a working definition is actually quite helpful for our time together. So I'm going to take a shot. So here we go. Here is my definition of geopolitics. Geopolitics is the current apparatus, structures and worldviews that define the arena in which the World Order operates. So I'm going to repeat that. Geopolitics is the current apparatus, structures and worldviews that define the arena in which the World Order operates. So social structures, economics, trade policy, industrial development, philosophy, private and public enterprise, they all exist twist and turn, based upon the working foundation and constraints of the geopolitical arena. Geopolitical realities in political chess are not the causation necessarily of every event or market movement, but they do represent the underlying guardrails and the raw materials by which the game is played. So we're going to test that definition. It's probably not perfect. We're going to refer back to it as our discussion develops to see if it indeed was a good starting point. Obviously you be your own judge in that one, but I at least hope that that has your wheels turning and preparing you with a mental map to tackle the discussion that we are going to start. Now, before I provide the blueprint, the overview of where we're going for this episode, Christie, I thought it would be fun to share the first time you remember a major geopolitical event and how it struck you, either personally or through the lens of an investment professional. So I'm going to start with you.
- [09:33]
Kristy Hamilton
It's actually funny because as I think about it, I know we've talked about this before, but I'm an elder millennial. I was born in 83, I just turned 40, but probably one of the most distinct memories that I have was actually during the Gulf War of all times. I remember watching the news with my dad, watching a video of a stealth bomber just flying over Baghdad at night and you can see the bombs dropping and then probably 30 seconds later the anti aircraft missile or the anti aircraft surface to air ballistic missiles or whatever they're called. I'm clearly not the war expert and I just remember as a kid though thinking how crazy it was because I had no concept of what any of that meant until later on when it's oh, those were bombs and we were there and there's a lot going on in that part of the world, so in hindsight I can see what it means. And then Obviously, through another lens. 911 and post 9 11, just everything that happened there. But I would say actually the biggest one just in terms of as an investment professional. I started at Cambridge in September of 2008. So I had a front row seat for the global financial crisis. The initial, but then also all of the stuff that happened thereafter and just how it filtered into the investment world. And I realized how complex it is and how funny it is that we tried to think that we could possibly project the future in any way, shape or form. But I digress. What about you? I would love to hear yours.
- [10:51]
John Bowman
So it's funny you mentioned first Gulf War. I was actually playing a high school basketball game during that invasion, or at least the initial beginning of that conflict. And I remember my dad, as we're heading to halftime, he like, pulled me aside. He's like, we just opened war against Iraq. I'm like, dad, I'm trying to win a game here against Charlottesville high school. I'm 16, 17 years old. Like, why are you bothering me with that? So it's funny you mentioned that. So as you said as a kid, this is all emotional versus intellectually vivid. I do have these minor memories of the Iranian hostage crisis of 79, 81 and their release moments after Reagan's inauguration. And I remember the family being glued to the TV. And by the way, TVs back then were the size of like a Mini Cooper. So this massive thing. And at the other side of your family room, both these stories were unfolding real time. So that was my personal, visceral experience. But professionally, I graduated college in 97, and that summer my first job was working in Boston. I think I've mentioned this on a previous episode. A naive young equity analyst following non US technology and consumer goods. And I was employing my DCF and my valuation, multiple ninja skills from undergrad finance and my CFA studies that I had just begun. I had it all figured out. Christie LG and Samsung in Korea, vast retailing. Nintendo and Panasonic in Japan, tsmc, a young TSMC in Taiwan. These were the future. And I was convinced they had higher intrinsic values based on my models than where they were trading. So this was easy. Textbooks told me how to make money. And then literally six weeks after I begun adulting in real life, July 97 hits. Thailand removes the dollar peg. The bot collapses. The Indonesian rupiah, Korean yuan and Japanese yen followed shortly thereafter. The whole region. This is the Asian crisis, of course, that we know now, fell into hysterics. Capital flight, hyperinflation, public debt all explode. So I young 23 year old John gets whipsawed. Not only because I was blind to the fact that fundamental valuation theory is only precise in a laboratory or an academic classroom, but I think more importantly, I didn't predict or understand the second and third order effects of that first domino. So it was a very visceral and permanent lesson that still whispers to me quite frankly on occasion. So that's my story. So where are we going in this episode? I first want to pull on two interesting threads in this discussion of geopolitics in investing. I first want to describe the near history. I say that intentionally, not the full history, but the near history of geopolitical analysis and its infiltration into our psyche as it relates to capital markets specifically, and perhaps some brief thoughts on why that is. And second, I'd like to share some common mistakes or myths associated with using geopolitics in your investment process that I've learned as we've learned during this research. And then I'm going to hand to Christy who is going to offer perspectives as always on how geopolitics has been historically excluded from investment programs and maybe some personal pitfalls or observations that you've seen with trying to incorporate. And then of course finally we will have our special guest join us to amplify, correct, explore all of this further. And today joining us are Anastasia Titarczyk, the Chief Investment Officer of New York common retirement fund, that is the 270 billion public pension for the state of New York, the third largest public pension in the US after the two California plans, and Marco Papich, partner and Chief strategist at Clocktower Group. Now I should mention as a point of disclaimer, we are very pleased and thankful that we worked with Marco to add a new reading on integrating geopolitical analysis for private investments into level 2 of the CAIA program this year. So very important addition to the Kaya canon that I think will really equip and help candidates.
- [14:41]
Kristy Hamilton
Absolutely.
- [14:43]
John Bowman
Okay, first thread. Why the recent obsession? I think understandable and needed obsession, I should say. There is no doubt that the history of geopolitical analysis extends back more than a century. It's informed world leaders, policy and priorities. Significantly, I was more interested on this journey in discovering how we reached this fever pitch from modern investment professionals. What led to this recent insatiable appetite, dialogue, interest? You might call it addiction to geopolitical analysis. Well, to illuminate that we need to go back to the mid-90s where two parallel and significant tracks were put into motion two political analysts well ahead of their time, lit a fuse each of them with the creation of firms dedicated to this trade and have largely defined the investment industry's main sources of knowledge today. First track can be traced back to the center for geopolitical studies or CGPS at Louisiana State University in Baton Rouge, Louisiana in the early 90s. There, a professor George Friedman, whom I just quoted a few moments ago, built a team that researched geopolitics. He built war gaming simulations and advised companies on geopolitical risks and opportunities. 1996 he extracted that team and founded Strategic Forecasting, or Stratfor, to commercialize this work with seven members of that CGPS team and they moved the headquarters to Austin, Texas. And Stratfor, by the way, more recently was acquired by Rain R A N E, a strategic risk consultancy in 2020. Friedman, however, just so you know, left about five years before that to start a new company, geopolitical futures in 2015, a subscription based service where he still is leading now. Now the lineage out of Friedman's tutelage is very impressive. Peter Zeihan joined the firm after his master's and worked there from 2000 to 2012 before he left to create his own consultancy. I'm sure most listeners know Peter and his firm Zeihan on geopolitics. Additionally, in 2007 Friedman hired and mentored a young Serbian who was studying for his Master's of Political science at the University of Texas. Marco Papich, our guest today. And in 2011 Marco himself went on to Montreal based BCA Research and he launched for BCA, a geopolitical practice there in 2012 that combined their award winning macro research with Marco's geopolitical analysis into a single framework. 2015, Marco hires Matt Gerken because they had worked together back at Stratfor and Matt took over the BCA practice in 2018 when Marco left for clock to. And by the way, I've only scratched the surface of that family tree of Stratfor, but as I said, there were two parallel tracks. So in 1998, this is less than two years after George launched the Stratfor. Ian Bremmer, another name I'm sure nearly Everybody on the pod knows. He stands up Eurasia Group with just 25,000 in his pocket to focus on the former republics of the Soviet Union. This was out of a cubicle in the World Policy Institute in New York City. Now he quickly expanded its emerging market coverage and then eventually he picked up developed markets in the wake of the gfc. But Ian's stated goal at the time, quite prophetically I might add, was to bring political science to the investment community and corporate decision makers. So since then, former diplomats, state leaders, military veterans are increasingly joining the investment industry or they're forming their own consulting organizations. But Eurasia and Stratfor and their respective diasporas, I would say, remain the thousand pound gorillas and have really defined this marketplace place. So that's interesting history and we know now that folks like Bremer and Papich and Zeihan are some of the most sought after investment conference speakers and podcast guests in the world. But as I said, I also want to evaluate and explore why, and especially why now. Well, I would pose a few reasons that I hope validate that earlier working definition I gave you. But also more importantly, the main reason the investment industry needs to keep a much closer eye, or maybe even several eyes on the ball of geopolitics going forward. So since the end of the Cold War, the story I described earlier, again partly in jest, the world has largely been lulled into what I would call complacent sleep. Now, I want to be careful and sensitive here because there have certainly been localized atrocities and suffering, but the 1980s kicked off a renaissance of relative peace and stability. From a historical context, some have even called this period Pax americana, channeling that 150 year period in the Roman Empire that saw unprecedented peace and economic prosperity of the ancient world. So why was this? And why has that era sunset now, according to most? Well, putting your personal politics aside, as Marco has written and talks about often, the Reagan and Thatcher eras of supply aside economics, that's Ronald Reagan in the US and of course Margaret Thatcher in the UK brought deregulation, privatization, laissez faire government, globalization of supply chains. All of that worldview and theory really provided a backdrop beginning in the 80s that unleashed a torrent of global economic growth with low inflation and cheap cost of capital. And this worldview, while designed in the laboratories of course, of Capitol Hill and Whitehall, was exported around the world and it became the working model for human flourishing. And there really wasn't any relevant competing school of thought. And with American hegemony after the collapse of communism, it was a global contagion that was the model that people would plug in. And the capital markets, as I described earlier, delivered. They delivered well under those conditions. Ian Bremmer, however, recently said this on his Gzero pod that sums up the transition we've been undergoing for the last few years. He said, quote, political risk is when political scientists begin causing Trouble for you in a normal day. You don't want political scientists. I love this. You'd much rather have an environment where the people in the boardroom can talk to the people that know the business. When the political scientists come in, that usually means there are greater costs, greater reasons to hedge, greater need to change behaviors than you otherwise would be prioritizing as a leader. So for 40 years, that's largely what we had, regardless of who was in office. Even after those original two leaders. We had a free, fair, transparent market that was largely self governed, largely well regulated, and it kept the political scientists, as Ian said, at a distance and maybe even quite bored. Well, it's widely understood and agreed that the world has entered a new phase where globalization has reversed. With near shoring bifurcated supply chains, nationalism and state executive power have reemerged as a popular mechanism for policy changes. In lieu of this period where the private sector was seen as the main tool for that, we have structurally higher inflation and interest rates that seem to be here to stay. And maybe most importantly, we've moved from, as I've already mentioned, an American unipolar world to a multipolar global construct. With the fall of the Soviet empire, the US is no longer united around a common enemy, nor does it have the means, or increasingly the interest to be the world's police officer. So in the strangest of ironies, two scary competing forces or superpowers. Most geopolitical analysts would argue they create some level of stability as successful diplomats and leaders can play them off of each other. As both sides know that rash decision making could have destructive ramifications for the world. They are aligned at least around a shared value of coexistence and survival. And by the way, I've mentioned my man crush on Henry Kissinger, but this was his whole detente, the easing of hostilities, because he constantly had this asset of Moscow and Washington working against each other and he would just play the chessboard to keep stability. So what happens when there are now multiple pockets of trade alliances, regional conflicts and wars, localized economic progress, and a variety of leaders no longer buying into one of the two competing worldviews? So we can easily sort the world map between us and them, but rather they are each pursuing their own nationalistic and self absorbed policies? And Bremer goes on to put it this way. In that same podcast I just quoted, he says that the belligerence in the current wars have neither the willingness nor the capacity to bring the conflicts to an end. There is no diplomacy occurring based upon a shared set of narratives, information, or even facts that create guardrails that lead to confidence and resolution. Of course, the answer to my rhetorical question about what happens when we move from this bipolar world to a zero polar world is that obviously it's self evident chaos and unpredictability happen. And Christy, you know, the capital markets hate one thing more than recessions and calamities, and that's uncertainty. And that leaves geopolitical analysis, as Marco states in his book Geopolitical Alpha. No longer, as we've been able to enjoy and take advantage of over the last 40 years, as exogenous or a nice to have or an overlay on the investment process, but inherent to it. Christy, you want to add anything on that? Because I know you've had some recent discussions in your household on just this subject.
- [23:54]
Kristy Hamilton
It's funny, my dad and I like to debate a host of different things and there is this idea adjacent to that that there's a lot of truths out there in the world, that this is the way that the world has always been. And the experience that we've had with the Washington Consensus is the way that things have always been. And the markets that have been born out of that are the way that things naturally occur. And obviously I come of age and the transition of that, just in terms of the increase in the geopolitical events, if you will, that pop up. So I just think it's interesting that as this transition happens, there's still this idea in a lot of investors that there are truths. For example, one that I really love is this idea that one truth that's inherent in capitalism is the supremacy of the shareholder. And if you look back at it, that's just basically deregulation. Laissez faire and Milton Friedman in the 70s saying shareholder supremacy once, and everybody's saying yes, actually not once. He said it way more than once, but still. So there's this idea again that a lot of the ideas that we have in capitalism and the way that our society is currently structured, particularly the financial side, are these inherent things, when in reality it has so much to do with the deregulation and the globalization. And we don't necessarily see then the flip side of what we have present day and how that connects to the corporatism and the almost beautiful fragility of our supply chains and critical manufacturing components like semiconductors. So we've had this wonderful low rate environment, world reserve currency, so we don't have to worry about inflation. And I don't think we have any concept for what happens when that finally breaks. But I have no concept of that either. So I don't pretend that I have any views. I just sit with the idea that I don't necessarily think that capitalism or the structure of today's society is anything but to your point earlier, but a social construct of how we have created it, if that makes sense.
- [25:43]
John Bowman
It reminded me as you were speaking, Kaya published a seminal report a couple years ago called Portfolio for the Future. And in it we posited that we were moving from the phase of the last 40 years that, of course, was defined by basically zero cost of capital, free money, low inflation, a tailwind of really strong capital market expectations. And I think it's all true. But I think what I've missed that now, this episode and the research that prepared us for it has taught me, is that the oxygen for all of that, the fuel for all of those elements and conditions I've just described was the geopolitical order, the Washington Consensus. And I think I missed that a couple of years ago. And this has been really helpful in thinking through the foundation of what caused those isolated economic conditions. The reality is something much more foundational caused it. So really interesting. Thread 2. Now, once the guests join us in studio, we're going to begin to explore how to begin thinking properly about geopolitical analysis and your investment process. But the other thread, I promise you, before we get there, was to share a couple common mistakes or myths we've learned along the way in preparation for this episode and our conversation and our study of the guests. So these are far from systematic proofs, I want to be clear. They're more like conceptual themes and patterns that we've noticed in our discussion and our research. So a couple of them I just want to point out. The first one was, I must admit, a punch in the gut. It was very hard to swallow the more I reflected on it, and it's this. We must be morally indifferent to be an effective user of geopolitical analysis. Now, our role as fiduciaries is not to construct a portfolio that succeeds in a world we want to see, but rather one that achieves the investment outcomes in the world that is likely to be. And as I reflected more on this, as I've said, I don't think we have a working precedent for it in modern finance and investment management. So just take the other elements of portfolio construction or the inputs. I should say, Christy, there's no moral high ground in deciding whether Nokia, Apple or RIM was going to win the handheld phone war, or whether going a little bit farther Back into my annals, Betamax or VHS was the more scalable home video technology. There are no good guys or bad guys that invade our thinking when deciding whether consumer staples or industrials are the more attractive industry. There's no axis of evil amongst asset classes that bias or jade our capital market expectations between say, high yield or private debt. But geopolitics is very different as the most likely outcomes and perhaps even worse, the outcomes that maybe are underpriced in the market and therefore ripe for making the most money for your beneficiaries could be the most morally decrepit or distasteful. The ones you don't want to imagine, the ones you don't want to root for by constructing portfolios around it. So how do you keep yourself from subconsciously rooting for the right outcome for the world through your capital market decisions? And that protection of objectivity through your investment process, through things like diversity of thought, challenging the status quo, giving freedom to name and shame potential biases that has crept in is arguably harder than the underlying geopolitical analysis itself. Self I would say, and those that are successful at this have cultivated a process that culminates in a moral and justice indifference. And now personally, I've been thinking a lot about this. I don't think that means you individually have to remove yourself from your personal preference at the voting machine, your religious beliefs or your strong opinions on world events. But it does necessarily mean that your process at work somehow needs to be emotionally isolated and sterilized from that. And that is way easier said than done. And I'm not sure anyone is doing this well yet. So I want to make sure we approach that in our Q and A in a few moments. Now, the second myth or mistake many make when thinking about the use of geopolitical analysis is what is it in the first place? So I want to be clear about what it's not as we study this effective geopolitical analysis that can be harnessed for things like long range beta or short term alpha. It's not just an awesome Rolodex that you can call upon for the inside scoop. It's not just a list of top risks. It's not just the rising fear of bad events happening. And it's not even just a view that volatility will increase because uncertainty is higher. Those are all part of the puzzle and they should be part of your toolbox, but a durable, repeatable geopolitical framework for your investment process. Harkening back to our opening definition, aims to do three things well. I would say A It takes a view on the long range trends in national relationships, alliances and political worldviews that will define that arena I mentioned earlier going forward and as we discussed, this is especially true and important in those rare moments when the world order is transitioning to a new super cycle, a multi decade new super cycle. So this is what I would call geopolitical beta and it is the most important element to get right if you're sitting in the CIO seat thinking about your long range thesis. B More opportunistically, proper geopolitical analysis integrated in your investment process seeks to identify outcomes that are not priced into the market based upon that long term view. So let's say this another way. Betting on the high probability outcome or against the low probability outcome doesn't make you money or generate alpha. But hedging to take advantage of or going long outcomes the market is underestimating is where opportunities lie, at least in the short term. So think Brexit or the Trump presidential win in 2016 to get a sense for what I mean by mispricing or underpricing. And finally, perhaps somewhat contradictory to what I just said, but very tactically, avoid trading on events, even ones that feel earth shaking at the moment. So one of the more famous pieces of work as I finish my portion here in the canon of important documents that have defined modern geopolitical analysis was a chart our guest Marco put together shortly after joining BCA Research and he's kept this current and what it does is it lists all the major historical geopolitical shops starting with the Hungarian revolution over 70 years ago. And the chart looks at each of those shocks and the max drawdown of the S&P 500 in reaction to the news and the subsequent performance after the drawdown. One month out, three months out, six months out and 12 months out. So Christy, another quiz here. What would be some events in the last 70 years that you would say that come to mind that led to the greatest drawdowns in the S and P? By the way, I did this test myself so I'm not just putting you on the spot.
- [32:31]
Kristy Hamilton
So short term ones, yes.
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John Bowman
So in the way they constructed this is peak to trough three months before and after said event.
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Kristy Hamilton
It was the biggest drawdown global financial crisis. If we threw NASDAQ in there, the dot com bust. I'm trying to think. Gosh, because a lot of them were like flash crashes from what I can remember. What am I missing? Clue me in.
- [32:52]
John Bowman
So think geopolitics. Because this was not just economic drawdowns Necessarily, let me tell you what I guessed just to expose both of us as not really having studied this and probably I'm sure there's listeners out there that have a better sense than maybe the two of us. But I would have guessed 9, 11, Cuban Missile Crisis, Yom Kippur war as freaking the world and therefore the markets out. All of those were on there, but nowhere near the top five. I'm just going to give you the top three. Okay. And again, these are geopolitical events. First, the COVID virus, that's fairly recent. In early 20 that was a 33% drop. Now if you think I'm cheating there, that that's not geopolitical. The number three, if you excluded that was when we struck Iran's Soleimani, 31% drop. Number two, the Russia Saudi oil price war in 2020, 34% drop. Wouldn't have thought of that one. And number one, and this really surprised me, the Mumbai terrorist attacks in 2006, a 43% drop. So as I said, I struck out. You struck out listeners. I hope that is helpful. Here's the little known secret, the much more important point I'm trying to make here. Despite those probably very uncomfortable drawdowns that we've experienced throughout our lifetime, Marco likes to summarize this chart with the following statement. If something blows up, just close your eyes and buy so events are not tradable events. Trends are very important in geopolitics. Events are not even the most black swan and perceived existential events of the last several generations result in the markets rebounding almost immediately. So that chart I mentioned, there were 54 events. In the version I looked at only seven. Seven of the 54 were still down from the peak 12 months later. That's 87% of them resulting in huge rebounds. And only one of those seven, by the way, is in recent histories. Only one of the seven was in the last 18 years and that was the US sanctions on Iran. In May of 19 the market was still down a measly 3%. So you could argue almost flat there. But still nonetheless, that was one of the exceptions. Otherwise, over the past couple of decades, if you bought on the news of these frightening events, you made a ton of money. That could be a trading strategy. Just buy when really bad and scary things happen. Now finally, Schroder's conducted an interesting study as well using the widely cited and followed global Political Risk Index gpr. This was created by two economists and it's an index of geopolitical risk going back to 1900 they construct it using news publications. It's meant to measure how heightened quote the threat realization and escalation of adverse events associated with wars, terrorism and any tensions among states and political actors. So Schroeder's wanted to test whether trading away from riskier assets into safe havens when that GPR index was deemed extreme would result in wise downside protection and outside returns. So to oversimplify the test, they basically tested three scenarios in all of these events, staying the course and what they called a risky portfolio, balancing risky and safe assets and adapted 60:40 structure or shifting to the safe portfolio at the peak of the risk until the index dropped back to more normal levels and then returning to the risky portfolio. Well, as you'd probably now guess from Marco's research a moment ago, with some exceptions here and there, riding these things out with a risk on portfolio created certainly more short term pain and volatility, but usually led to better long term outperformance. And that study was linked in the show notes. So hold your nose, hold your breath, don't try to get too cute. This is the age old don't market time. But particularly around scary geopolitical events, you're better off just staying the course or even doubling down is what the data suggests. So that is my introduction. Christie, I'm going to hand to you, give us your wisdom on what you've seen through your time in the cioc.
- [36:47]
Kristy Hamilton
So to your point, I think it's funny how this transition has occurred because I don't want to say it came out of nowhere, but the transition is still ongoing and I think a lot of people are still trying to figure out how to incorporate this into their portfolios. So just for context, when I started in the industry, so think back 2008, it just wasn't a part of the process, wasn't included. You're a long term investor to the point of being agnostic as to where valuations are. I remember somebody asking me if you had a billion dollars sitting in cash and everything was overvalued, would you follow the asset allocation? And the theory says yes, particularly for endowments and such at the time. Because if you're an entity that expects to exist in perpetuity, the ten year doesn't technically even matter, at least in theory or for the broader incentive stuff. So again when I'm brought in, I am literally taught to be completely agnostic as to what's going on in the world. And that transition has now happened within not just the changing definition. To your point of what Geopolitics actually is, but also the increase in complexity from alliances and supply chains and territorial disputes and security partnerships and alliances and et cetera. You now also have to include geoeconomics, the broader macro environment, financial markets, liquid liquidity of financial markets, social structures, politics, and then how they all interplay. And I think that as investors, a lot of times we would sit there daunted. And when you think about how to build a portfolio that generates returns, you really have three levers to pull. You have your asset allocation, you have your security selection, and you have your market timing. And while there are multiple ways to incorporate geopolitical analysis, I think historically, just given the biases, John, that you went over, so the bias for the desired outcome, the temptation to trade on events, it leads to this more market timing lever being pressed when it comes to incorporating geopolitics into your broader investment portfolio or process. And I'll add, so a couple of other biases that I've noticed in addition to those two that you said. There's as Americans in particular, we tend to have a home bias. So it builds on the what is morally desired point that you made in the sense that we project our sensibilities onto other countries, so it can be difficult to truly understand and grasp the incentives and constraints and experiences external to the United States. So we benefit from the fact that we are, in fact, an isolated country flanked by two large oceans that share a border with our friends. Our country is huge. It's fairly easy to move around in between states. We're all fairly friendly in this area of the world. We're the world's reserve currency as well. So we have the ability to borrow. I don't want to say ad nauseam at this point or should knock on wood at least, but it allows us to borrow at least without the messiness of rampant inflation that comes with being priced in another currency or in a foreign currency. I say all of that to say I don't necessarily think also that we understand how to function or be ready for a multiple polar world, particularly if we do lose any dominance, and I don't even think that that's necessarily the outcome that's going to happen. I just think that when you have US Dominance and security promises worldwide as that I don't want to say goes away, but as that weakens a lot of us or at least I first and foremost struggle with necessarily how to incorporate that, especially when we typically project linearly and we're saying, oh, it goes up 8% a year, so it will always go up 8% a year. I will also say the other bias that happens is the over reliance on the gut feeling. So my gut feeling says that because the Fed printed money in the wake of the global financial crisis, that there will be rampant inflation. And we saw it eventually, but not for that reason or the we're due for a market correction or the overemphasis on US election outcomes, particularly during the time of the Washington consensus where it's basically a neoliberal regime, whether or not you vote Republican or Democrat or Libertarian or sometimes even Green Party. So I think that again, you have all these biases and then on top of it, historically the industry has relied on pockets of expertise. You go to somebody who's been in Washington or done the job or something and you get their expertise and they have sat in that role before. But again, that's projecting our linear status quo view of this is how it's going to continue to go. And I don't think it necessarily captures the world that we are currently in. So I say all that to say that we have a lot that we're working against. Did you want to add something there, John?
- [40:58]
John Bowman
No, I just, I think your point a couple moments ago on perspective and we're all indoctrinated as far as history and what's right and wrong. And I don't mean that maliciously. It's just we have to be cognizant. And I think fellow Americans that are listening, we're the worst at this. In my travels and having lived overseas, ask a Singaporean about the Vietnam War, you're going to get a very different answer than the way we've thought about it, or at least our older generations in America have thought about it. Ask my friends in Turkey who they think the Crusaders were. Ask my British friends what they think of the Revolutionary War. It's just, you might be giggling, but the reality is that they were all taught and frankly, the perspectives are objectively very different depending on where you sit, where you grew up, how you were taught. And I think this plays into geopolitics and it does to some degree exacerbate this new era where there are bespoke case by case worldviews that are popping up all over the place when you don't have two competing or three competing major superpowers that are basically syndicating a worldview that you can plug into or not. It's all case by case. Now, that's unprecedented, certainly in couple generations, and it does add to the uncertainty. So I thought it's a very good.
- [42:13]
Kristy Hamilton
Point that you raise the world in which we live or we will be living. It's actually interesting because I will add apparently as of 2020, 2021, as things roll over, we feel the deglobalization, but it's not quite panning out in the data yet. But there's still this idea of we are at peak globalization and we're going to see that fractured multipolar world going forward. So yeah, going back though, in my experience and from what I saw historically, geopolitics and this analysis was basically integrated as more of a one off based on mitigating the hand wringing of some person on the team or within the broader organization or on the board or broader discussion of. To your point, how is this one event going to impact our portfolio? So that was usually through risk mitigation and a lot of times market timing. So we should sell all of our equity and it's like, well, should you? Particularly because there are some people who are great at market timing. But again, on average the data shows us that most of us are just not very good because you have to be right on the front end and you have to be right on the back end as well. So it's really hard again to justify using this analysis as just risk mitigation, particularly when we don't have a good framework for predicting the future. And this is really complex stuff. So I actually personally think, and I get the sense after having read Marco's book, which I don't know if we've mentioned it yet, but Geopolitical Alpha Marco's book is phenomenal. I think it's a really great read, particularly for understanding how to think about different components of the geopolitics and reminding me as an American that I don't understand the intricacies of Italian politics. So trying to trade or mitigate risk in my portfolio based on that is a fool's errand unless I do some actual thought work in terms of how to incorporate it in the portfolio. So again, I think it's important to get beyond that risk mitigation market timing part and really think about it in terms of how it can inform your processes. So John, I love that you brought up Covid and all of this because I remember in March, right as we went into lockdown and just the market's tanking and I remember we had a deep value manager who bought Amazon because it hit their screen and at that point I'm just thinking we're still going to buy stuff, we're still going to have to live so it seemed weird to me. I mean, I get it, the broader leisure industry, obviously none of us want to sit on a confined metal tube 30,000ft over the Earth with a bunch of people who might have cooties, if you will. Not to downplay it, but just particularly at the beginning when we didn't have a lot of information. But there were quite a few people, quite a few of us on the allocator side that ended up rebalancing because it just didn't make sense for Amazon to beat down so hard that a deep value manager is like this is now a value stock. So I think it can again inform your processes because you can look at it and say, does this make sense in terms of what I understand about the world and that what I understand has to be deeply thought over and researched and considered and not just one person. Again, gut feeling. But I think one of the best ways, John, you mentioned, because you have to incorporate the long range trends, you have to think about it in terms of what's not priced into the markets and you have to avoid that trading on the knee jerk of events. And I think one of the best ways to really think about that in a portfolio and to possibly add this to your process is to think about it in terms of more of a thematic overlay within the portfolio. I think there are a lot of organizations that have been talking about doing this and doing it very well, whether that be an economic regime overlay within the portfolio. We think the probability is high that there will be a high inflation or a high rate environment through this period. And you can do it in a way that doesn't completely truncate your ability to meet your returns in the event you are wrong, especially just with the talent and the investment acumen in the industry. I've heard of some really great groups just doing deep research on things like the energy transition, on the broader. Basically everything that was talked about at Davos this week and really looking at it and thinking some of these goals are aspirational. What is realistic in terms of what the market is not thinking about. And I think the teams that are doing that are actually doing it, incorporating this analysis into very interesting ways within the portfolio.
- [46:06]
John Bowman
Fantastic. Really well said and listeners. I think we're going to have to leave it there before we get to our guests though, which I think we're all excited. Christy and I especially I've talked to you a lot about Franklin Templeton's assembly and their curation of this broad array of of GPs of investment management firms across a number of different asset classes. And through the coming episodes, we're actually going to spend a little bit of time with each of them. So up first during halftime. Stay tuned. Before you jump up for your bio break or your workout break, take a listen to my conversation with Mike Comparato, managing director of Benefit Street Partners, which is a private credit firm within the Franklin Templeton family. And we'll be right back after that with our guest segment. Stay tuned. Well, welcome back to Capital Decanted. As promised, I am now here with Mike Comparato who is head of commercial real estate for Benefit Street Partners and president of Franklin BSP Realty Trust. Mike, welcome to Capital Decanted.
- [47:09]
Mike Comparato
Thanks for having me, John.
- [47:10]
John Bowman
Yeah, thanks for spending a few minutes with us. I think listeners will be really interested to hear a little bit more about the almost $80 billion AUM benefit street partners across the credit spectrum, at least my understanding from senior secured all the way down to distressed opportunistic. And I think you guys cross several asset classes, as I think you will tell us, with your focus on real estate in particular. Mike has been with the firm for about 10 years and just again in the theme of this family of GPs or asset managers that is in the Franklin Templeton alternatives universe, this acquisition was completed in 2019, so a fairly new entry to the family. So Mike, why don't you just extend that brief introduction I gave about Benefit Street Partners and tell us a little bit about the business model and kind of its span of strategies.
- [48:00]
Mike Comparato
Thanks, John, again for having me. It is a very wide product offering that we have and you touched on most of the major points. So we have a very large direct lending business. On the corporate side. We have a special situations group that does pretty much anything and everything within the special situations group and have a continuing growing commercial real estate platform, which is the group that I obviously head and run and can speak most intelligently about. But yes, overall it's a pretty diversified credit platform that ranges a broad spectrum of different investment theses.
- [48:36]
John Bowman
So that's great. Mike, let me ask you a little bit about client fit. You mentioned the diversified set of credit strategies from direct lending to asset backed opportunities, particularly the area in real estate that you're focused on when you think about client profile across that spectrum for a long term pool of capital, which are the majority of your clients, how do you kind of counsel them to think about these strategies fitting within a diversified portfolio?
- [49:03]
Mike Comparato
I think that's the key word is diversified. And I think that over the years we've seen certainly direct lending and private lending expand dramatically just as an asset class. We're seeing commercial real estate expand again as an asset class both on equity investments and credit investments. So I think that the alternative space clearly has a larger piece of the overall piece. And I think when investors are looking at really building a diversified non correlated portfolio, they need to have these kind of products in there. To achieve that, you need exposure to direct lending. In the corporate side, you need exposure to commercial real estate, whether it's equity, credit or both. I think the continued word is diversification and access to the best managers out there that can do that in a proficient manner.
- [50:03]
John Bowman
Well, we all know the story, listeners of bank lending post GFC and Dodd Frank. And so I'd encourage you to check out these skill based strategies at Benefit Street Partners under Mike and his partner's leadership. So Mike, thanks so much for joining us and we hope to see you again soon.
- [50:19]
Mike Comparato
Really appreciate the time, John, thank you.
- [50:23]
John Bowman
Well, welcome back to Capital Decanted. I am joined in studio just delighted to have Anastasia Titichuk, CIO of the New York Common Retirement Fund here and Marko Papich, partner and chief strategist at Clocktower Group. Welcome to Capital Decanted.
- [50:40]
Anastasia Tatarczyk
Thank you.
- [50:41]
John Bowman
Well, we spent some time thinking through the increasing attention and interest and you might even say concern about geopolitical influence, geopolitical integration into the investment process, which we're going to explore this but I think is a change, certainly at least a trajectory of evolution over the last 10 years that we'll talk through a little bit. But before we get to best practices, maybe lessons learned and a few case studies on how to do that properly, I thought we would start with a little bit of background so listeners can understand the worldview and the mental map in which both of you approach your task and your job. So I thought I would first start with your backgrounds and how it has shaped your interest and your view of geopolitics because both of you have talked very openly and publicly about your background and why that has maybe had implications for how you think about the world. Marco, you were born in a country, as you like to say, that no longer exists anymore, Yugoslavia. And so therefore there is no home bias, there is no home in many ways that plague I think most of us when we think about an objective view of geopolitics. Anastasia, you've talked openly about being born in Moscow during the Cold War and maybe having that affect a bias against emerging markets, at least in certain times. So I'd love to hear, while very different from Each of you how that has shaped your views as you approach today. So, Anastasiya, maybe I'll start with you.
- [52:09]
Anastasia Tatarczyk
Sure. So you've mentioned. I've talked about how perhaps being born in Moscow makes me a little bit more cautious as an investor in emerging markets. And I think we've seen the reasons why over the last couple years for sure, because I like to know the rules of the game I play. And sometimes in emerging markets that can be difficult. And if you're not a complete insider, it could be very challenging to read the politics. And as in the case of Russia, I think as an investor, it's very hard to deal with a situation where Russia is attacking Ukraine and suddenly all your Russian investments are either lost or frozen, depending on how optimistic you want to be about the eventual outcome.
- [52:55]
John Bowman
And how about you, Marco? Serbian, but obviously would've at least in childhood probably identified as a Yugoslav. So how has that changed the way you view what has become your profession?
- [53:06]
Marko Papich
I think it has really helped me growing up in Yugoslavia and then when the country began this very long and painful spiral into chaos, I actually left to go to the Middle East. So I also grew up in Jordan and Iraq as part of my childhood. And I think it makes you realize that a lot of the things that very smart, very connected and very experienced people take for granted can disappear overnight. And I'm sure Anastasia had the same experience in the Soviet Union because a lot of people who spent their careers trying to figure out what was going happened to the Soviet Union did not have the expectation of its collapse as well. So there's this sensitivity, I think, from that background to the higher probability of tail risk events, so you are more open to explaining how those paradigm shifts can happen. At the same time, I don't want to give off the impression that that makes me a bearish person. In fact, it's the exact opposite. When you have seen such a paradigm shift occurring and complete collapse of the society, and yet everyone still figures it out and makes it to the other side, you also tend to not really get too high or too low by any particular moment in any particular system. So obviously it also gave me a real interest. When you're an 8 year old and you start learning concepts such as inflation, hyperinflation, you start learning about what a stealth bomber can do, what a Tomahawk missile is. When you start learning those things at a very young age, I think obviously it steered me towards this career. But I would say the one thing, while I don't have a home bias in My analysis, I do have it in sports, and Noah Djokovic and Nikola Jokic are clearly the best athletes in their respective sports. So I'm just going to leave it.
- [54:50]
Anastasia Tatarczyk
That I'm not going to argue with your last point. And perhaps you and I agree on a lot of things, but I would say growing up elsewhere has also taught me that unless you've really lived somewhere, you don't quite understand all the nuances. Maybe you don't even if you're living somewhere, but at least you understand a lot more than a person who is merely a tourist.
- [55:12]
John Bowman
Yes, well, that was a very kind way of perhaps saying, my beloved country of Americans are typically pretty myopic in their views of the world. So this is, I think, very instructive of what makes a global citizen that gives you an objective view of the world. I want to stay with you, Marco, on maybe the second introduction question, I was really blown away somewhat. I came into this naive, other than the work that I did as an asset manager and using political analysis from time to time back when I was practicing in the 90s and 2000s. But I was just shocked to see what I would call this Stratfor diaspora that has become really the family tree of geopolitical analysis and Stratforward for the listeners that don't know. One of the founders, George Freeman, really, in many ways you can agree or disagree with this. It seems to me the father of geopolitical analysis and his disciples, you being one, Marco, in many ways have really populated the industry writ large, and you can follow those lineages at your own interest. But really shocking. So I'd like to maybe use that as an anchor to think through over the course of those 20 years, Marco, how you've seen this just explode when you were a young analyst maybe at Stratford, to now running your own business line at Clocktower, in your discussions with the investment community. How is the conversation different than when.
- [56:35]
Marko Papich
You first started in the 1990s, when Stratford was founded by George Friedman? And to give credit where credit is due, Eurasia Group's Ian Bremmer started his firm. I think George started maybe like a year earlier. But the two of them are, of course, the sources of those two coaching trees. To use the analogy to sports, a lot of people didn't take geopolitics seriously because it was the very epicenter of an era where the government was withdrawing itself from the domestic political scene, from a domestic macroeconomic scene. The lessons of the Ronald Reagan and Margaret Thatcher revolutions were that you needed less government. That became the Best practice that was packaged, repackaged and then exported out of the IMF and the World bank to the rest of the world, the so called Washington Consensus. And then on the international stage, of course, with the Soviet Union collapsing and the ascendancy of American unipolarity, there was a sense that you didn't really need geopolitics. Think about Ian Predmer's decision to name his firm Eurasia Group. He named it that because he specifically began his career offering advice on the various Central Asian republics that came out of the Soviet Union. So there was no sense like, oh, you should talk to me about the French election, because it doesn't matter if you're an investor, if you're running a business. There simply is no geopolitical investment, relevant insights in the developed markets. It's really just an EM thing and really even then, just those ems that are new to the game. So the reason that these two coaching trees are so powerful in our industry and also in the corporate world is because there just simply was nobody else other than these two gentlemen, George Friedman and Ian Bremmer, who saw that, well, maybe the globalization move is not always going to be unidirectional. Maybe there will be some demand for this analysis and they've obviously proved to be correct. And the other issue that I think is important is that very few consultancies employ a framework other than I have a Rolodex and I'm going to use it to help you as an allocator. So a lot of the shops that you see around the world pop up as people leave government and then they fall as they reenter. But these two really applied a particular framework different in both of their intellectual threads, but they had a framework that can be taught. And that's where you see a lot of the alumni from both the Eurasia Group and Stratfor now having positions across the financial and corporate world in this.
- [58:59]
John Bowman
Arena, honest to say, you've obviously watched the same movie as we all have, but from a different seat. And you talked about having grown up as I did during the Cold War. And then there's this two to three decade, depending on how you want to define it, relative time of peace. As far as tail events, to use Marco's word. As you've been an investor and now a CIO of a very large plan, how have you seen or maybe even directed the geopolitical overlay, thematic research, influence evolve in the time that you've been an investor?
- [59:33]
Anastasia Tatarczyk
Well, I think first perspective of a very large fund, it's very hard for us to be tactical. So we certainly don't use the geopolitical research for a one year time frames. Let's say it's more of a 10 year outlook and then what we're trying to get are broad themes. So to use China as a very topical example, reality is that in this country right now, regardless of who wins the next election, there is a definite onshoring theme and there's a theme where this country is going to be very cautious in its dealing with China. So as an investor it doesn't necessarily make me want to have a 10% allocation to China. I use 10% as a nice round number. I'm going to be cautious. Similarly, if I look around the world and I look at some of the geopolitical research going back to France as an example, maybe France wasn't relevant 30 years ago when things were normal. But if we look across European politics now, you see some of the key themes developing in terms of polarization, the far right and the far left emerging. So to me as an investor with a long term outlook, it's going to tell me that I'm just going to see a lot more problems pop up in the world. Again, I'm a US based investor, most of my liabilities are in dollars. So it is going to make me more cautious on the margin what I make some of these decisions. But of course again I will use partners on the ground, general partners who have a better sense of what's going there so they can position a little bit better. And yes, because of this cautious outlook, I'm going to be more likely to hire somebody with a strong local presence and probably native speakers in any geography because they're going to be much better positioned to understand the investing landscape than anybody who is looking from the outside.
- [61:26]
Marko Papich
If I can dovetail on what Anastasia is saying, I think she is revealing a very important point that most investors miss about politics and geopolitics, which is that geopolitical events are largely useless and irrelevant and I'm being very hyperbolic but quantitative analysis really shows this. I've done a lot of work big end studies of geopolitical events that simply show that there is no impact on risk assets beyond three months. So a lot of investors get burned on their first experience trying to trade geopolitics and then their conclusion is well then it must not matter and that's incorrect. You can perhaps ignore geopolitical events, but geopolitical trends do matter. So rather than thinking about geopolitics as a tactical issue, it's really about capturing a long term beta and it's about having that first pillar, the base of your strategic asset allocation, which over the long term is definitely going to be impacted. I would say politics and geopolitics are more relevant than really anything else. They underlie inflation and growth expectations in most economies.
- [62:30]
Christy Hamilton
Really great point. Just with the trends in particular. And you spend quite a bit of time in your book walking through the possible end of the Washington Consensus. So the period from the 1980s to the 2000s that put many of us to sleep in terms of risks and implications of these major conflicts and other instabilities, you've already touched on a few of the highlights or broader points of this period. But beyond that, why do you think we're beginning a new era?
- [62:53]
Marko Papich
Well, I don't think we're beginning a new era. I think we're smack right in the middle of this new era. In my book, which was published in 2020, a lot of the research that went behind it was 2018, 2019, I had already determined that we're out of the Washington Consensus era. And just explain a little bit. In the 1980s you had these two unrelated but self reinforcing trends. One was a domestic political trend of laissez faire capitalism, supply side revolution. Margaret Thatcher and Ronald Reagan turned out to be right. Francois Mitterrand in France turned out to be wrong and he was punished by the market quite viciously for it. And then on the other side you had the geopolitical event which was collapse of Soviet Union, end of bipolarity, a unipolar moment. And we entered this world where geopolitics became a tailwind to investors. But what we actually learned as an epistemic community was the wrong lesson, which is that politics and geopolitics doesn't matter. No, no, no, no, no. It was. The very pillar of the great moderation was geopolitics. It wasn't, no offense, but it wasn't Volcker. He could have raised interest rates all he wanted. But if you were not in a globalized world, if you did not have a massive unleashing of labor supply by the entrance of China in Eastern Europe into the global labor market, if you didn't have those forces, we would have probably still had pretty sticky inflation. So there were a lot of factors going on. They were playing in the background. But the lesson that investors took was like, well, I don't have to deal with this. And so what we did as an industry is I think we over professionalized, over indexed to quantitative methods and to trying to figure out how valuations, how earnings, how very CFA like things really matter to investors. And I think the problem is that we clearly now have a complete reversal, and there's many reasons for that. But I think the Washington consensus has evolved. So what was laissez faire on the domestic front is now more dirigious. The government is clearly more involved. There's industrial policy even in the bastions of laissez faire liberalism, such as the United Kingdom. In the United States, they may be actually the countries with the highest delta in the change. And then on the geopolitical front, I think it's clear we're in a multipolar world. And I think these two forces are creating a completely different strategic asset allocation implications for allocators, and they're here to stay. And I think we're smacking the middle of it. And I think it's going to take five, 10 years before we see the pendulum maybe swing back towards some other paradigm at least.
- [65:20]
John Bowman
So both of you mentioned Novak Djokovic. I'm a Nadal guy, but I'm just going to go with it. Since you're the guest, I want to knock that ball back over the net to Anastasia, because I'd love your thoughts on just this. Regardless of what we call these regimes or epochs or eras that Marco's describing, I think we all agree that there's some sense that we're either starting in the middle of this retreat of globalization, nationalism, near shoring or onshoring is what you described a few moments ago, Anastasia, and that's changed. Inflation and populism and volatility and alpha predictions by all accounts. So do you, however, think that that requires a very different approach to thinking about capital market returns and portfolio construction? Have you shifted significantly in your thinking and your team processing?
- [66:08]
Anastasia Tatarczyk
I think over the last decade, it's been a very easy decision to just own us. If you owned our stock market, you would have done much better than if you own anything else. And I think because most investors have a recency bias, people are going to continue to own the domestic stock market. So I think what that means is that there are going to be more opportunities to invest globally and you are going to see divergence. I think the best example that you see now is what's going on in Japan, where that stock market is outperforming. And it's also teaching a valuable lesson that actually, no, all developed economies don't grow together. Because I think if we talk about Europe and the US you talk about the difference in growth. But you assume if US is growing fine, Europe is going to be slightly better. It might be worse. There are structural issues there, but you don't think of the differences. And I think because of some of the themes that Marco mentioned like on shoring and you no longer have the availability of global labor for all the things that you do, I think potentially you could see a lot of divergence across markets and perhaps you'll have another good decade coming to emerging markets at some point.
- [67:21]
Marko Papich
I agree with that. I think that's a very, very nuanced perspective. And Anastasia has said herself her bias is to be actually cautious and I think we should heed her view therefore that there could be this pendulum swing that goes away from the U.S. i think a couple of other things to remember is that US performed really well in a disinflationary environment because the stock market is so overweight to what works great when you have a risk parity world, in particular the long duration assets such as SaaS, companies, tech. The world we're entering today is a world where we're going to have to build stuff. Planes, trains and automobiles and good old boring Europe and Japan, God bless them, they can't make a single SaaS stock worth anything. But they can build trains, planes and automobiles. And we're seeing that. We're seeing very large corporates like TSMC become quite disenchanted and disappointed with their efforts to onshore in the US and actually it was reported, I think late last year that TSMC basically approached the US government and asked if they can just do the same thing in Japan. To Anastasia's point, I think our investment community is a little bit confused in Japan. I think there's just way too much research being published on monetary policy in Japan. To me that's not an interesting story. I think what's interesting is what Anastasia is talking about which is this re industrialization and the fact that places like Europe and Japan may be better leveraged to the new world we're in because of the sectoral composition of their equity and fundamental economy.
- [68:49]
Anastasia Tatarczyk
I would just disagree a little bit because I think for Europe you have an energy problem that needs to be solved and then they can continue to make things.
- [68:58]
John Bowman
Both of you are bringing up a really interesting point, Christy, and I'll pass it back to you just momentarily. But perhaps the silver lining of geopolitical dislocation. The old adage in our industry of course is that correlations go to one in times of crisis. But if there's geopolitical dislocation could there actually be a return of broader diversification? True diversification, where you've got blocks of economic development and geopolitical wranglings and partnerships that develop that are somewhat uncorrelated, or at least more uncorrelated than they have been in the past. So I think that's food for thought, too, is that there could be a silver lining in portfolio construction. Back to those basic building blocks of diversification. But, Christie, I'll pass back to you.
- [69:42]
Christy Hamilton
Well, thank you for that. And I will say, I think one of the themes that keeps coming up is that it's complicated to integrate this and you have to take a nuanced view. So with that in mind, Marco, before you think about even integrating this type of analysis into the investment framework, how do you even advise teams on building this type of competency, or dare I even say talent in this area? And what are your views on developing it internally versus maybe engaging with a geopolitical analysis firm or more of a professionalized analyst in this area?
- [70:11]
Marko Papich
Yeah. So I think maybe the one disservice we're doing to our industry today is that we have picked a Russian and a Serb to speak to these issues. And the reason I say that is because I don't want to send a message that you have to watch your country go through a civil war or an apocalyptic spiral to become a professional. And I was really honored that Kaya incorporated my framework into the syllabus, because the whole point, my mission in my career, what I wake up to do every day, is to teach investors to incorporate my framework of thinking about politics and geopolitics into their asset allocation. And I think it can be done. And I think that anyone can do it. Doesn't matter where you've been born. So the first issue is to have a starting point, not a theory, not a method, not something that's foolproof. And it's going to work all the time because that doesn't exist in our industry. This is a false hope, but a framework. How do you start thinking about politics and geopolitics? And what I've contributed to that debate is by creating this constraint framework where I don't think that we should focus on what policymakers want or even what their background is, their ideology, their thinking. We should really focus on the material world that surrounds them that will ultimately create the political path of least resistance. It doesn't work all the time. There's many times where politicians and policymakers would deviate from their material constraints. I would say Vladimir Putin's intentions Ukraine are a good example of that. But within a pretty short period of time, if they did that, they will be whipsawed back into reality by those material constraints which remember, don't change. So that's the first thing that I try to teach investors. The second thing that I try to teach investors is okay, let's establish some of these longer term trends. How do they impact inflation and growth projections? So while my book was titled the Geopolitical Alpha hashtag shameless plug, the truth is that who cares about the alpha. Like Anastasia said, whatever, something happens, whatever. The point is the longer term it should have been really called geopolitical beta. And that's where I think I work very closely with large pools of capital asset managers on how to incorporate different scenarios of the world. I have my bias of where I think the world is going, but hey, if you have a different one, let's incorporate those scenarios into what you think your strategic asset allocation should be. And then my third advice, which I think is very important is that we need diversity in our labor force and what I mean by that is diversity of thought. So again, we are overprofessionalized and that is a byproduct of the last 40 years of great moderation withdrawal of government unipolarity, blah blah blah blah blah. So we've over professionalized on a certain rubric of what makes an investor. And I just think that you need to give a lot of different people from different intellectual backgrounds in terms of what they studied in college where they work, a chance because their perspectives, methodologically, epistemologically will be useful in crafting your long term views. You cannot simply have a staff where everyone has a BA in economics. Look at the people who work for you and if that's the case, you're in trouble in this world, you're in big trouble.
- [73:16]
John Bowman
I want to pick your brain a bit more on this constraint framework because it is to your point. Thank you. Is now included in the KAYA curriculum, but also such a key foundation of much of your work. So I'll get back to that in a moment. But Anastasia, quick question here. You mentioned that you were more cautious on emerging markets. You want to know the rules of the game before you invest or play in a certain arena, which is understandable. We think about risk premia or receiving a premium to invest in riskier things as one of the true foundations of our industry. We do this with countries, we do this with industries. Maybe we're doing it with ESG elements to a degree right now. Do you think that's starting to develop in geopolitics and is part of your concern that you're not getting paid enough for that uncertainty? And do you expect that some of this will begin to price itself in as we move to this new era?
- [74:09]
Anastasia Tatarczyk
I think sometimes it's priced in, sometimes it's not. So to give an easy example, if I'm thinking of investing in real estate in Europe or investing in real estate in the U.S. those don't seem to be particularly controversial. Let's say if you stay away from office. But I'm going to want a slightly better return for Europe probably just because my own benefits are paid in dollars. So it has nothing to do with geopolitics. I just, you know, big real estate that I would own as a fund is going to be somewhat similar. But I would say if I'm looking at a real estate fund, I'm going to put Africa as an example. Even though we don't have a huge present there, then I'm going to expect a premium. And I would argue that premium does exist for lots of reasons and that premium, like anything in the markets, it can vary over time because people can get very excited about certain themes. But the premium to me is always there.
- [75:06]
John Bowman
I expect this to professionalize and you would think if Marco is correct about this new era that markets would begin to be a little bit more efficient on a relative basis about thinking through the money would move, capital allocations would shift and those premias at least would start to develop. Doesn't take away from the fact that there will be mispricing. So I think that's a very good point. But it'll be interesting to see whether this geopolitical premia mechanism develops a little bit. Marco. Okay, let's get crunchy for our listeners a little bit here. We've danced around working this into the investment process. You just alluded to this constraint framework which I think I speak for myself here, not you necessarily, but I think often when I was practicing and when I often hear from geopolitical analysts, put that in quotes. It's typically about the risk that bad things happen. And you already noted that events rarely actually move the markets over a three to six month period you're going to get a whipsaw that probably lose a lot of particularly skittish people money in the short term. But overall events don't really provide an investment opportunity. But regimes and trends are critical. And you have this great quote in your book that you mentioned a couple of times, which is preferences are optional and subject to constraints, whereas constraints are neither optional nor subject to preferences. So when we think about the constraint framework and the community or industry's mispricing of potential outcomes of events, how do we create a durable, persistent process? How do you suggest clients create a durable process to work this into their portfolio construction, security, selection? How do we even get started on that?
- [76:46]
Marko Papich
So this was a question that I was asked when I joined the financial industry in 2011. So you mentioned that I started my career at Stratfor, which is the political risk consultancy, and I'm very happy that I have the coaching tree I have and that I started my career there. But political risk consultancy did not prepare me for the rigors of the financial industry. And ultimately, this is an industry where we have to generate returns higher than market expectations and we have to really create calls that are very clear and investable. You can't write a report that says that Turkey will experience political volatility over the next 12 months. And then whether there's a coup or the deputy Finance Minister resigns, you declare victory 12 months later. That's not how finance. So how do we incorporate political analysis? When I joined BCA Research, where I spent nine years in Montreal, which is the oldest investment research firm, independent investment research firm in the world, I really benefited from this integration with asset allocation process. And what I mean by that is that I realized that what investors need from politics and geopolitics is a starting point. They need a framework that actually is not just useful, but also it's compatible with their skill sets. So they're not to go too deep into it. But there is a lot of work in social psychology, in intelligence, in philosophy, that basically really speaks to the tragedy of the human condition, which is that we humans are part of a Greek tragedy where we are not really in charge of our own destiny. Human will, the ability to make your own lot in life, is actually overstated by enlightenment, which gave the human, the self, individual, a central part in the story. And we're all products of the enlightenment, especially in the west, so we overstate the importance of the individual and the person. But the actual research, whether it's again, social psychology, whether it's application to intelligence and national security, whether it's philosophy basically says that humans are bound by material constraints. So the reason that's so important for investors is because guess what we're good at? We're good at data, we're good at analyzing the real world. Guess what we're not good at? We're not good at philosophizing. About what Vladimir Putin's thinking. So what we can do is by focusing on the material world and the world of constraints, we can assess whether a certain issue or theme or country will be able to proceed on a particular path. So what I tell my clients is produce net assessments that are rooted in the material world of constraints on particular geographies, countries or themes that you're interested in. You think that Indonesia is a great investment opportunity. Okay, let's do a net assessment. What does Indonesia have to do? What does it need to do? What can it do given the material constraints of politics, geopolitics, macroeconomics, demographics and so on? And then what you do when you create these net assessments is you have a very clear view as an investor of what needs to happen and what are the diagnostic issues that you should monitor for change if you're bullish, if these three issues change, I need to change to be bearish. If I'm bearish, here's the three structural reforms Indonesia has to do for me to be bullish. And this is the process that can be done, can be done by issue and can be done by theme. It can be done on the big picture. Are we in a Washington consensus or are we in a more derigious world? Can be done on a much more smaller issue. Is European energy crisis going to be resolved? What needs to be done? What are the constraints to that materially? And it doesn't require you to get close to a politician. It doesn't require you to speak to somebody who frequents the smoke filled rooms full of supposed insights. Those things are actually not relevant to that analysis. And that's what I try to work with clients. And that's how you integrate politics and geopolitics into your framework.
- [80:36]
Christy Hamilton
And not to see a building on that. Can you actually talk about how you integrate all of this in y common? Where do you see the biggest mistakes and biases come into play and how do you actively protect against those?
- [80:46]
Anastasia Tatarczyk
I think our mistakes have been when we get excited about a geography and we jump in and we don't understand all the nuances. And I'd say they haven't been mistakes on scale. But the most common theme is take the theme off the growing middle class and what that means. I think it's a real theme, it's continuing, but it's very hard to implement in certain emerging markets because you might not understand the political issues. And Marco used an example of Indonesia. I agree, sometimes you have great themes, but you might not understand the level of corruption or you might not understand the infrastructure needs for certain things. So the theme is there, but it's very hard to implement on a local level. And that's when you end up missing out on the returns.
- [81:33]
John Bowman
Okay, in our final stretch here, a little bit of lightning round. We, shockingly, in the time we've been together, have not talked about many of the existing events, challenges, wars, conflicts that are currently going on. And we mentioned Ian Bremmer earlier. He talked about 2024, most recently in a report being the year of Voldemort, the year that shall not be mentioned. There's so many things happening at the same time. And maybe, Marco, you'll look at this and say, look, this is what I deal with every year. There's always four or five crazy tale events. But let's just be honest, listeners, as you know, Russia, Ukraine persists, the Iranian terrorist proxies continue to escalate and take advantage of this Israeli Hamas war. And then of course, we have this thing in November in the states that we call the presidential election, which could have huge ramifications. The one I'd add here. And you can pick whichever of these or none of these that you think investors should be most concerned about. But at the time of this recording, Taiwan has just swept the DPP into power and it was a strong show of anti reunification against Beijing. And so all of those things I've named four. I'm sure there's more. But Marco, you talk about being under Damocles sword right now. How are you telling clients to think through all of those events and try to put some level of cohesive simplicity in structuring portfolios for 2024?
- [82:56]
Marko Papich
I'm going to try to keep this like in 60 seconds. Okay. Which obviously does not do it justice because I want to hear what Anastasia also has to say. I would say Taiwan election. Actually, I would take the other side of your view. I think it shows that Beijing is committed to some sort of detente with the U.S. there's been no response to the DPP victory. And part of the reason is that DPP only won because the other side was split. In fact, the support for independence has been declining in Taiwan. So that's something to note. The status quo is strengthened and the incoming president had to soften his lie. He had to soften his rhetoric in order to win. Something very important to note. So this is actually very, very positive from a geopolitical risk perspective. Israel, Hamas, I do not expect it to become a regional war. It has clearly escalated to other geographies. But I don't think it will become a wider conflict. One of the things that folks are not focusing on is Iran, Saudi Arabia detente concluded in 2022 has given Iran a lot of different wins. A win in Syria, a win in Yemen, and most importantly a win in Iraq. This has meant that all the retaliation by Iranian proxies has been focused on non really investment relevant issues. Obviously Red Sea is not investment irrelevant. But imagine if the Houthis were striking north, not south. Imagine if they were striking Saudi facilities, not random containers in the Red Sea. That would be much, much more investment relevant. And there's a reason they're not striking Saudi Arabia. It's this Iran Saudi detente that not very many people paid attention to. And then finally on Ukraine, Russia, I actually have said that the war has been in stasis since September of 2022. Market clearly has agreed with me. European assets have basically launched a really massive rally since then. And I would argue that in 2024 we will see the conflict further descend into a frozen conflict where both sides are too exhausted to really continue in any meaningful way. So I actually think that you could see the beginnings of a stabilization of this conflict. Now. Is there any alpha to be generated? I'm not sure. I'm more optimistic than Anastasia about Europe's energy crisis. There is an absolute tsunami. It's not a wave, it's a tsunami of LNG coming that will drown the global markets in the next three years. And if you're a long term investor, the fact that European energy costs are high for three years, they want to deindustrialize. Europe has had to deal with higher energy costs for their industrial outputs anyways, even when Russia was piping gas. So I'm actually really bullish on Europe and particularly on some of the central Eastern European emerging market countries that perhaps still have a little bit of a risk premium because of Ukraine. So we get to the final one, the one that actually I think matters. U.S. election matters. I think it will impact monetary policy over the next 12 months. And I think we have two diametrically different outcomes. Normally I would say presidents don't really matter that much. This time I think they do. I think Trump will mathematically carry the entire Congress. If he wins, he'll have unified government, he will be loose on fiscal policy and he will be very aggressive towards the Fed. So you have very, very high nominal GDP growth environment, likely negative for the dollar and definitely negative for bonds if Trump wins. Whereas if Biden wins, I think the Fed would be encouraged to return to orthodoxy immediately after that victory. And fiscal policy would not be stimulative because it's highly unlikely Biden will carry the House. So this actually is a really, really important election. I think it will be important for the markets next 12 months, and I think it will be important for asset allocators going forward with two different outcomes in terms of fiscal and monetary policy.
- [86:20]
John Bowman
And you just said it. Well, Marco, you typically would say, and correct me if I'm wrong, that the person sitting in the Oval Office seat matters much less than the median voter views. And this is a break from that. So certainly deeper conversation with Marco. I look forward to hearing more about that. But Anastasia, that's a long list of calamities and unfortunate situations. What are the ones that you're most worried about that have the most implications for portfolio construction?
- [86:45]
Anastasia Tatarczyk
Well, I think I agree with Marco on all the major conflict points. I would add that after something terrible happens, there's always an opportunity on the ground. So in the case of a frozen conflict in Russia, Ukraine, there's going to be an opportunity for somebody in infrastructure. And even on Marco's European point, there is a right price for everything. Europe will have structurally higher energy costs because it does not have energy independence. And LNG will help it return back to normal, but it's still higher cost than anything else. What I would say is that on the U.S. elections, I think about it slightly differently. I've realized over the years that I have negative edge when it comes to politics. So I read people like Marco to try to understand the landscape a little bit. But what I think about is in the age of AI and the huge improvement in quality of fake reports and everything else, what implication that will have on any election that we have and what are the implications then on policy after we see that play out?
- [87:51]
John Bowman
Marco, I just want to end it with a little bit of an audible here because Anastasia just reminded me of something that you talk about quite regularly. Setting aside who you think will win, setting aside maybe even who you want to win. The most important thing is which of the outcomes is least priced in to the markets. And you've talked about this with Brexit, you talked about this with Trump in 16. Which outcome in the US presidential election is least understood or priced into the marketplace that we should be cognizant of at least?
- [88:21]
Marko Papich
Wow, this is such an interesting question. Thank you for that. First of all, I just want to preface this by saying that I bathe myself in aloof indifference. So I don't care who wins. I truly don't I meditate on this. I'm a practicing nihilist. It's the only way to incorporate politics and geopolitics, by the way, into finance. And I really want to emphasize this. I'm glad you trigger me on that. You really have to practice this. Just like you don't care whether Boeing or Airbus wins when you invest, you cannot care about politics in that way. You have to leave that at home, not when you're an investment professional. That said, I think the outcome that's the most unlikely and most political scientist in the US would disagree with me is a third party candidate winning. It is seen as impossible. But I have to tell you that I have very robust empirical evidence that that is what a median American wants. There just hasn't been political supply, there's political demand, there just isn't supply. And there's all sorts of structural constraints, material constraints for why. But I don't think they're as robust as most experts think. And I look at something like the French election in 2017. I look at something like the rise of various other parties like AfD in Germany is now polling second to the center right CDU. When you look at things like that, you realize that nothing is permanent and America has had political realignments in the past. So there you go. If you want something that people don't expect is a centrist win in 2024 by a third party candidate, not anyone currently running. It would have to be somebody who announces over the next couple of months.
- [89:52]
John Bowman
Well, in full disclosure, my first presidential election was 1992. Any guesses, speaking of third party candidates, of who I voted for as an 18 year old.
- [90:00]
Marko Papich
Ross Perot.
- [90:01]
John Bowman
Yes, yes, Ross Perot.
- [90:03]
Christy Hamilton
Vote Ross for boss.
- [90:05]
John Bowman
There you go. Didn't end well. But that'll be fascinating to watch. Well, listen, Anastasia, Marco, it is always a pleasure to see you. Fascinating discussion that I think we could have continued for longer if material constraints allowed us. Marco, to borrow one of your phrases, Happy New Year both and I hope to see you in 2024.
- [90:22]
Anastasia Tatarczyk
Thank you, thank you for having me.
- [90:24]
John Bowman
And listeners, stay tuned for the final sip. Welcome back to the Last sip. Christy, that was such a good conversation. I have to say I wish I could be a fly on the wall in Honest ASEA's investment committee process. She's got such a clear way and I think a committed way to think about this unlike and well ahead I think I should say of most that I've talked to. But as you think about that conversation we just had about the preparation in the Entire introductory segment. Where does that leave you? What are your big takeaways that you're hanging on?
- [90:55]
Kristy Hamilton
I really loved the idea of Geopolitical Beta. I thought that that was a really great concept and I think one that makes sense conceptually just in terms of really how to think about it. When I think about the complexity of the world and finance in particular, and all the moving parts, I think it's hard to say that I could possibly understand how butterfly flapping its wings in Asia would possibly impact us over here, if you will. So I thought that that was interesting. And then I also really appreciate it. I know it is a smaller thought that we just touched on, but when Marco mentioned the whole idea of diversity of thought, this is not an offense to our industry, but I will say there has been a push towards more just financial brute force data. And I think that some of the smartest investors that I have known are outside of that were humanities majors back in the 60s. I think that it gets you outside of the what is or what could be, because I think a lot of times when you are brought up in a world and you learn the facts of that world and you learn the structure of that world, you don't question why it is the way that it is. And I think that a lot of times outsiders and people who don't necessarily come through finance are really good at being able to question and see puzzle pieces differently or ask questions to get to a different answer, if you will. So those are my two favorite takeaways as of now. I also loved that he's a political nihilist, kindred spirit there and fellow UT grad as well. So.
- [92:17]
Anastasia Tatarczyk
Woo, woo.
- [92:18]
John Bowman
Yeah, that struck me as well. It's funny you say Geopolitical Beta. I don't know if he said it in our discussion, but he said in other pockets that I've heard. And that might have been a better title for the book because I think that actually is much more of what he's talking about in that book. And I would echo Christy. I'd highly recommend it. I had just a couple more developed reflections from earlier thoughts. So these are not new, but maybe the conversation helped me marinate and perhaps polish some edges on these things. And first I would say is that I don't think we should make the same mistake we made with ESG and are trying to fix this retroactively. So what do I mean by that? Well, I've been very vocal publicly that the worst mistake, those of us, of which I am in this camp that believe that material Sustainability or workers rights or governance health issues should be considered in security analysis and asset allocation. The biggest mistake we made was creating this blunt instrument that mashed it all up and called it esg, because what it did is that it created this sense that it's an independent overlay or it's a veto at the end of the process, when in reality it should be integrated into our capital market expectations over the long term and part of our valuation process for any individual company of any analyst. And similarly, I would say here from a warning perspective, we need to be careful to have the token geopolitical expert sitting in the back of the room of the investment committee, smoking on his pipe in between conversations and chiming in once in a while with this random geopolitical view that should give us pause on a recommendation. So, as we said in the beginning, the structural rules of the game are the starting point for your view of the future and your resulting investment thesis and ultimately your portfolio construction. Maybe a metaphor that maybe helps with this I was thinking about is let's just say you're a member of a golf club. So you play the same course most Saturdays, and you know where to hit your drive off the tee. You know what iron you're going to have in. You know how the greens slope and you get invited to play a different course the next Saturday. And you knew at your home course that the first tee you need to draw your drive around the trees to the left, and then you're going to have a seven iron in, and then the green slopes from left to right. Well, you go to this new course, a completely different layout, and you crush your drive with a little draw and guess what? It's in the trees. And then you hit your seven iron perfectly. You flush it. But you really needed to hit a six iron. It's much longer, that hole at the different course. And by the way, you hit it to the right side of the green and this green slopes to the right instead of to the left. What I'm trying to say here is that the framework and the map, the arena that I started this whole episode with has completely changed. So all of your formulas and working constructs, and you mentioned this, Christie, about inflation and valuation and interest rates. To some extent, we need to reprogram and rewire our entire thinking if the super cycle is truly changing, if this is a different arena that we're now playing the game within. So a lot to think about here. And then just very briefly, I'll say too, that was, I think, the phrase of the discussion Was this importance of indifferent nihilism when coming to elections and wars? Not sure. I completely believe Marco when he says he doesn't care at all, but he has to force himself to not care at all, at least in his work. And I think I said this earlier. It doesn't strip your humanism, your moral ballast. I don't think it does. But it does raise the stakes for constructing teams. You mentioned this documenting your decision making, vigilantly protecting constructive debate within your investment process, or all of that stuff is going to seep in because it's just human nature. So those are my big takeaways. So much more to chew on. As always. We're also gonna do a fun personal question as we close Kristi. So the one that we thought of this time. What is a piece of advice you received that has stuck with you throughout your life? Ooh.
- [96:04]
Kristy Hamilton
So I jokingly, when we were originally thinking through the list, because we came up with like a big list of questions listeners just to think through in advance. And one sec tickled our fancy. And I remember my friend Ashley Riegel in business school saying, never date a guy with two last names. Which is funny. And I obviously don't actually agree with that, but that was hilariously the first thing that popped into my head. So real professional there. My favorite from my dad, I think I've said this publicly before was just never be the smartest person in the room. You want to be in rooms with people smarter than you. And from my mentor and former boss, Ryan Bailey, when the world is on fire sale insurance, I like it.
- [96:43]
John Bowman
I like all those. Except the two names for those poor young men that have hyphenated names.
- [96:48]
Kristy Hamilton
No offense, I know they always sound really great. Well, it's the Tucker Jones. Like that there is a first and a last name. So yeah, she made that joke. And then a couple of our friends ended up marrying wonderful men that had the two last name things.
- [97:02]
John Bowman
So I'm glad we've debunked that one. I've had a lot. I've had a lot. I've been blessed to have a lot of good mentors, a lot of people that have spoken into my life. I'll just choose one. But I remember when I was young, around the same time I told you that story of the Asian crisis. I was scared to death of public speaking, which is odd now because I spent a ton of my time doing it and quite enjoy it. But I remember my dad told me who also, I don't think he would say if he were listening was a natural public speaker, so he had to learn and force competency and capability there. But he would say, look, in most settings, when you're doing speeches or moderating a panel, you're going to be the person that knows the most about that topic and take comfort in that. That doesn't mean there's not brilliantly smart people and intelligent people sitting in that room of 50 or maybe several hundred, but you're probably the most prepared. And so just relax. And I think that was really good advice. I've heard other people say, imagine the audience naked, which would just make me giggle, not actually give me confidence. But that one was really good. And that's probably not exclusive. I know there's smarter people that know more about whatever subject I'm talking about in almost every audience, but I think generally, as a rule, that that was really good. So that has helped me, and I still think about that almost 30 years into my public speaking career.
- [98:21]
Kristy Hamilton
I love that. So you actually reminded me, Sorry to hijack yours, but my dad came to an event that was in Austin. It was for one of the pensions they're put on hundreds of people in the room. I was moderating a panel of people that were way bigger experts than me and going on Cliff Asness and before just barons in the oil industry. And they let me invite him because he's alternatives investor, very smart, thoughtful investor. And he's like, how are you feeling? I was like, nervous. And he's like, remember, they can't hit you and they can't take away your birthday. And then I had to go on. And I was like, what does that even mean? And so I literally started the panel laughing. So, yeah, dads are the best. I get it.
- [98:58]
John Bowman
There you go.
- [98:59]
Kristy Hamilton
Moms are, too.
- [99:00]
John Bowman
There you go. Well, listeners, it's been a fun journey, a really good one. And I think maybe even more than any episode we've done, I think left me with the most to do. So I hope if you're sitting in the seat of an investor professional, that this has equipped you to at least have a lot more conversations and ask more questions. And we look forward to continuing. This discussion is far from over, but this has been a great starting point towards that discussion. So thanks for joining, and we'll see you next time on Capitol Decanter.